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Inflation will be the sizzling topic for markets in the week ahead

With fresh evidence the labor market is on the mend, investors’ focus shifts to inflation in the coming week and whether it will continue to heat up or show signs of abating.

There is a series of inflation data expected: the consumer price index and the producer price index, released Wednesday and Thursday, respectively.

Jobs and inflation are two key factors that influence the Federal Reserve in making its decisions on policy.

Markets are hanging on anything that will help determine when the central bank will start to step away from the measures it took to support the economy during the pandemic, including its $120 billion per month purchases of Treasury bonds and mortgage-backed securities.

Economists said if there is another strong employment report for August, then that would support the Fed moving to start tapering its bond-buying program. But one wild card for the economy is the course of the latest Covid outbreak and whether it will crimp economic activity and hiring.

In making a case that inflation is fleeting, Fed Chairman Jerome Powell has pointed to what seems to be a temporary sharp jump in used car prices, and also the decline in lumber prices after a sharp run-up. The Fed’s target for inflation is 2%, but policymakers said they will tolerate an average range around 2% before acting, as long as inflation does not stay too high for too long.

Fed speakers

There are a few Federal Reserve officials speaking in the week ahead. Market pros are looking to them to help clarify the central bank’s intentions on tapering. The expectation is that the Fed will announce in September or later in the fall that it will taper back its $120 billion a month bond program, starting at the end of the year or early next year.

The tapering is expected to be gradual and continue for 10 months or more. The Fed’s own forecasts show its first rate hikes happening in 2023.

More information could come from the Fed when officials gather for their annual symposium in Jackson Hole, Wyoming at the end of the month. But action is not expected to be taken until the September meeting or later.

Earnings continue to roll out in the coming week, but the volume of the releases drops off dramatically. Reports are expected from Walt Disney, eBay, Wendy’s and others.

Reference: CNBC